We were given a refund when the return was processed under s.143(1). On scrutiny the Assessing Officer has now raised a demand and has also charged interest under s.234D on the refund. Is that right, for how long does the interest run, and can he do it for an assessment year that is older than the section itself?
Yes, on the conditions in sub-section (1). Section 234D charges simple interest where a refund is granted to the assessee under s.143(1) and either (a) no refund is due on regular assessment, or (b) the amount refunded under s.143(1) exceeds the amount refundable on regular assessment. The rate as printed on the departmental Year 2018 edition is one-half per cent, on the whole or the excess amount so refunded, for every month or part of a month comprised in the period from the date of grant of refund to the date of such regular assessment. The section was inserted by the Finance Act, 2003 with effect from 1 June 2003, and the words "one-half per cent" were substituted for "two-third" by the Taxation Laws (Amendment) Act, 2003 with effect from 8 September 2003 — both recorded in footnotes 29 and 30 on the departmental Year 2008 edition. Sub-section (2) provides that where, as a result of an order under s.154, s.155, s.250, s.254, s.260, s.262, s.263 or s.264, or an order of the Settlement Commission under s.245D(4), the refund granted under s.143(1) is held to be correctly allowed either in whole or in part, the interest chargeable under sub-section (1) shall be reduced accordingly. Explanation 1 makes a first-time assessment under s.147 or s.153A a regular assessment for the purposes of the section. Explanation 2, printed on the Year 2016 and Year 2018 editions, reads: "For the removal of doubts, it is hereby declared that the provisions of this section shall also apply to an assessment year commencing before the 1st day of June, 2003 if the proceedings in respect of such assessment year is completed after the said date." I could NOT establish from any reachable departmental page which amending Act inserted Explanation 2 or from what date — the editions that print it carry no footnotes, and the editions that carry footnotes do not print it.
Decided by the CBDT Circulars & Instructions (Not applicable — statutory text) on 2003-06-01, reported as Section 234D of the Income-tax Act, 1961, Chapter XVII (Collection and Recovery of Tax), transcribed from incometaxindia.gov.in/w/section-234d-23 (heading "Interest on excess refund", Year: 2018), corroborated on incometaxindia.gov.in/w/section-234d-13 (Year: 2016), with the amendment footnotes taken from incometaxindia.gov.in/w/section-234d-10 (Year: 2008) and incometaxindia.gov.in/w/section-234d (Year: 2009), and the rate and period corroborated on the departmental tutorial page incometaxindia.gov.in/w/interest-on-excess-refund-granted-to-the-taxpayer. It bears on section 234D, section 143(1), section 143(3), section 144, section 147, section 153A, section 154, section 155, section 250, section 254, section 263, section 264, section 245D(4), section 234B, section 234C, section 244A of the Income Tax Act 1961, in Refunds, Interest & Condonation, Demand, Recovery & Stay and Assessment & Scrutiny matters.
The charge bites in the ordinary case of a processing refund followed by a scrutiny demand, and it is raised late, in the computation sheet, where it is often paid without being read. Three points decide most disputes. First, the trigger is a refund granted under s.143(1) specifically; a refund granted on some other footing is outside the words of sub-section (1). Second, the period is closed at both ends — from the date of grant of the refund to the date of the regular assessment — so interest does not run beyond the regular assessment, and where the assessment is set aside and remade the reader has to ask which assessment the period runs to. Third, sub-section (2) is a mandatory reduction, not a discretion: if the appellate order holds the refund correctly allowed in whole or in part, the interest must be reduced to that extent, and the officer giving effect to the appellate order has to do it without being asked. THE LIBRARY ALREADY HOLDS TWO DECISIONS on the retrospective reach of the section and the reader with a pre-1 June 2003 assessment year should be sent to them rather than to this entry — CIT v Indian Oil Corporation (slug cit-v-indian-oil-corporation-234d-explanation-2-retrospective) and CIT v Gujarat State Financial Services (slug cit-v-gujarat-state-financial-services-234d-earlier-assessment-years). This entry states only what the section says; it makes no statement about what either decision holds.
Binding on the department, not on the assessee or the courts. An assessee may rely on a circular that is beneficial to them.
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Section 234D, as printed on the departmental page stamped Year 2018, reads: "234D. (1) Subject to the other provisions of this Act, where any refund is granted to the assessee under sub-section (1) of section 143, and— (a) no refund is due on regular assessment; or (b) the amount refunded under sub-section (1) of section 143 exceeds the amount refundable on regular assessment, the assessee shall be liable to pay simple interest at the rate of one-half per cent on the whole or the excess amount so refunded, for every month or part of a month comprised in the period from the date of grant of refund to the date of such regular assessment. (2) Where, as a result of an order under section 154 or section 155 or section 250 or section 254 or section 260 or section 262 or section 263 or section 264 or an order of the Settlement Commission under sub-section (4) of section 245D, the amount of refund granted under sub-section (1) of section 143 is held to be correctly allowed, either in whole or in part, as the case may be, then, the interest chargeable, if any, under sub-section (1) shall be reduced accordingly. Explanation 1.—Where, in relation to an assessment year, an assessment is made for the first time under section 147 or section 153A, the assessment so made shall be regarded as a regular assessment for the purposes of this section. Explanation 2.—For the removal of doubts, it is hereby declared that the provisions of this section shall also apply to an assessment year commencing before the 1st day of June, 2003 if the proceedings in respect of such assessment year is completed after the said date." The departmental page stamped Year 2008 prints the section without Explanation 2 and carries footnote 29, "Inserted by the Finance Act, 2003, w.e.f. 1-6-2003", against the section, and footnote 30, "Substituted for 'two-third' by the Taxation Laws (Amendment) Act, 2003, w.e.f. 8-9-2003", against the rate.
Not a judgment. The statutory position is that s.234D charges simple interest where a refund granted to the assessee under s.143(1) is followed by a regular assessment on which either no refund is due or the amount refunded exceeds the amount refundable; that the rate is one-half per cent for every month or part of a month, computed on the whole or the excess amount so refunded, for the period from the date of grant of refund to the date of the regular assessment; that the section was inserted by the Finance Act, 2003 with effect from 1 June 2003 and the rate substituted for "two-third" by the Taxation Laws (Amendment) Act, 2003 with effect from 8 September 2003; that sub-section (2) requires the interest to be reduced accordingly where an order under s.154, s.155, s.250, s.254, s.260, s.262, s.263 or s.264, or an order of the Settlement Commission under s.245D(4), holds the refund correctly allowed in whole or in part; that Explanation 1 treats a first-time assessment under s.147 or s.153A as a regular assessment for the purposes of the section; and that Explanation 2 declares that the section applies also to an assessment year commencing before 1 June 2003 if the proceedings for that year are completed after that date. The amending Act that inserted Explanation 2, and the date from which it was inserted, are not established by any departmental page I could reach.
Not a judgment; no judicial reasoning is stated for the section.
Explanation 2.—For the removal of doubts, it is hereby declared that the provisions of this section shall also apply to an assessment year commencing before the 1st day of June, 2003 if the proceedings in respect of such assessment year is completed after the said date.
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Handle my notice → Ask a CA on WhatsAppYes, on the conditions in sub-section (1). Section 234D charges simple interest where a refund is granted to the assessee under s.143(1) and either (a) no refund is due on regular assessment, or (b) the amount refunded under s.143(1) exceeds the amount refundable on regular assessment. The rate as printed on the departmental Year 2018 edition is one-half per cent, on the whole or the excess amount so refunded, for every month or part of a month comprised in the period from the date of grant of refund to the date of such regular assessment. The section was inserted by the Finance Act, 2003 with effect from 1 June 2003, and the words "one-half per cent" were substituted for "two-third" by the Taxation Laws (Amendment) Act, 2003 with effect from 8 September 2003 — both recorded in footnotes 29 and 30 on the departmental Year 2008 edition. Sub-section (2) provides that where, as a result of an order under s.154, s.155, s.250, s.254, s.260, s.262, s.263 or s.264, or an order of the Settlement Commission under s.245D(4), the refund granted under s.143(1) is held to be correctly allowed either in whole or in part, the interest chargeable under sub-section (1) shall be reduced accordingly. Explanation 1 makes a first-time assessment under s.147 or s.153A a regular assessment for the purposes of the section. Explanation 2, printed on the Year 2016 and Year 2018 editions, reads: "For the removal of doubts, it is hereby declared that the provisions of this section shall also apply to an assessment year commencing before the 1st day of June, 2003 if the proceedings in respect of such assessment year is completed after the said date." I could NOT establish from any reachable departmental page which amending Act inserted Explanation 2 or from what date — the editions that print it carry no footnotes, and the editions that carry footnotes do not print it. This was decided by the CBDT Circulars & Instructions (Not applicable — statutory text) and bears on section 234D, section 143(1), section 143(3), section 144, section 147, section 153A, section 154, section 155, section 250, section 254, section 263, section 264, section 245D(4), section 234B, section 234C, section 244A of the Income Tax Act 1961. It is reported as Section 234D of the Income-tax Act, 1961, Chapter XVII (Collection and Recovery of Tax), transcribed from incometaxindia.gov.in/w/section-234d-23 (heading "Interest on excess refund", Year: 2018), corroborated on incometaxindia.gov.in/w/section-234d-13 (Year: 2016), with the amendment footnotes taken from incometaxindia.gov.in/w/section-234d-10 (Year: 2008) and incometaxindia.gov.in/w/section-234d (Year: 2009), and the rate and period corroborated on the departmental tutorial page incometaxindia.gov.in/w/interest-on-excess-refund-granted-to-the-taxpayer. The charge bites in the ordinary case of a processing refund followed by a scrutiny demand, and it is raised late, in the computation sheet, where it is often paid without being read. Three points decide most disputes. First, the trigger is a refund granted under s.143(1) specifically; a refund granted on some other footing is outside the words of sub-section (1). Second, the period is closed at both ends — from the date of grant of the refund to the date of the regular assessment — so interest does not run beyond the regular assessment, and where the assessment is set aside and remade the reader has to ask which assessment the period runs to. Third, sub-section (2) is a mandatory reduction, not a discretion: if the appellate order holds the refund correctly allowed in whole or in part, the interest must be reduced to that extent, and the officer giving effect to the appellate order has to do it without being asked. THE LIBRARY ALREADY HOLDS TWO DECISIONS on the retrospective reach of the section and the reader with a pre-1 June 2003 assessment year should be sent to them rather than to this entry — CIT v Indian Oil Corporation (slug cit-v-indian-oil-corporation-234d-explanation-2-retrospective) and CIT v Gujarat State Financial Services (slug cit-v-gujarat-state-financial-services-234d-earlier-assessment-years). This entry states only what the section says; it makes no statement about what either decision holds. If it applies to you, the first step is this: Check first that the refund charged to interest was in fact granted under s.143(1). Sub-section (1) is worded to that sub-section alone, and a refund granted otherwise is outside it.
Section 234D, as printed on the departmental page stamped Year 2018, reads: "234D. (1) Subject to the other provisions of this Act, where any refund is granted to the assessee under sub-section (1) of section 143, and— (a) no refund is due on regular assessment; or (b) the amount refunded under sub-section (1) of section 143 exceeds the amount refundable on regular assessment, the assessee shall be liable to pay simple interest at the rate of one-half per cent on the whole or the excess amount so refunded, for every month or part of a month comprised in the period from the date of grant of refund to the date of such regular assessment. (2) Where, as a result of an order under section 154 or section 155 or section 250 or section 254 or section 260 or section 262 or section 263 or section 264 or an order of the Settlement Commission under sub-section (4) of section 245D, the amount of refund granted under sub-section (1) of section 143 is held to be correctly allowed, either in whole or in part, as the case may be, then, the interest chargeable, if any, under sub-section (1) shall be reduced accordingly. Explanation 1.—Where, in relation to an assessment year, an assessment is made for the first time under section 147 or section 153A, the assessment so made shall be regarded as a regular assessment for the purposes of this section. Explanation 2.—For the removal of doubts, it is hereby declared that the provisions of this section shall also apply to an assessment year commencing before the 1st day of June, 2003 if the proceedings in respect of such assessment year is completed after the said date." The departmental page stamped Year 2008 prints the section without Explanation 2 and carries footnote 29, "Inserted by the Finance Act, 2003, w.e.f. 1-6-2003", against the section, and footnote 30, "Substituted for 'two-third' by the Taxation Laws (Amendment) Act, 2003, w.e.f. 8-9-2003", against the rate. The matter was decided on 2003-06-01 by the CBDT Circulars & Instructions (Not applicable — statutory text). On those facts the CBDT Circulars & Instructions held as follows. Not a judgment. The statutory position is that s.234D charges simple interest where a refund granted to the assessee under s.143(1) is followed by a regular assessment on which either no refund is due or the amount refunded exceeds the amount refundable; that the rate is one-half per cent for every month or part of a month, computed on the whole or the excess amount so refunded, for the period from the date of grant of refund to the date of the regular assessment; that the section was inserted by the Finance Act, 2003 with effect from 1 June 2003 and the rate substituted for "two-third" by the Taxation Laws (Amendment) Act, 2003 with effect from 8 September 2003; that sub-section (2) requires the interest to be reduced accordingly where an order under s.154, s.155, s.250, s.254, s.260, s.262, s.263 or s.264, or an order of the Settlement Commission under s.245D(4), holds the refund correctly allowed in whole or in part; that Explanation 1 treats a first-time assessment under s.147 or s.153A as a regular assessment for the purposes of the section; and that Explanation 2 declares that the section applies also to an assessment year commencing before 1 June 2003 if the proceedings for that year are completed after that date. The amending Act that inserted Explanation 2, and the date from which it was inserted, are not established by any departmental page I could reach.
Not a judgment; no judicial reasoning is stated for the section. In the words reproduced by the source cited on this page: "Explanation 2.—For the removal of doubts, it is hereby declared that the provisions of this section shall also apply to an assessment year commencing before the 1st day of June, 2003 if the proceedings in respect of such assessment year is completed after the said date."
It was decided by the CBDT Circulars & Instructions on 2003-06-01 and is reported as Section 234D of the Income-tax Act, 1961, Chapter XVII (Collection and Recovery of Tax), transcribed from incometaxindia.gov.in/w/section-234d-23 (heading "Interest on excess refund", Year: 2018), corroborated on incometaxindia.gov.in/w/section-234d-13 (Year: 2016), with the amendment footnotes taken from incometaxindia.gov.in/w/section-234d-10 (Year: 2008) and incometaxindia.gov.in/w/section-234d (Year: 2009), and the rate and period corroborated on the departmental tutorial page incometaxindia.gov.in/w/interest-on-excess-refund-granted-to-the-taxpayer. Binding on the department, not on the assessee or the courts. An assessee may rely on a circular that is beneficial to them. A CBDT circular or instruction binds officers of the department but not the assessee and not the courts. Where a circular helps you, you may hold the department to it. Where it hurts you, it cannot override the Act or a judgment. On section 234D, section 143(1), section 143(3), section 144, section 147, section 153A, section 154, section 155, section 250, section 254, section 263, section 264, section 245D(4), section 234B, section 234C, section 244A, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It cuts both ways and is cited by both sides. Not a judgment. The statutory position is that s.234D charges simple interest where a refund granted to the assessee under s.143(1) is followed by a regular assessment on which either no refund is due or the amount refunded exceeds the amount refundable; that the rate is one-half per cent for every month or part of a month, computed on the whole or the excess amount so refunded, for the period from the date of grant of refund to the date of the regular assessment; that the section was inserted by the Finance Act, 2003 with effect from 1 June 2003 and the rate substituted for "two-third" by the Taxation Laws (Amendment) Act, 2003 with effect from 8 September 2003; that sub-section (2) requires the interest to be reduced accordingly where an order under s.154, s.155, s.250, s.254, s.260, s.262, s.263 or s.264, or an order of the Settlement Commission under s.245D(4), holds the refund correctly allowed in whole or in part; that Explanation 1 treats a first-time assessment under s.147 or s.153A as a regular assessment for the purposes of the section; and that Explanation 2 declares that the section applies also to an assessment year commencing before 1 June 2003 if the proceedings for that year are completed after that date. The amending Act that inserted Explanation 2, and the date from which it was inserted, are not established by any departmental page I could reach. It arises in Refunds, Interest & Condonation, Demand, Recovery & Stay and Assessment & Scrutiny matters, on section 234D, section 143(1), section 143(3), section 144, section 147, section 153A, section 154, section 155, section 250, section 254, section 263, section 264, section 245D(4), section 234B, section 234C, section 244A of the Income Tax Act 1961, and was decided by Not applicable — statutory text. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Check the period actually applied in the computation: it runs from the date of grant of the refund to the date of the regular assessment, and not beyond. Ask for the date of grant the officer has used, because the interest is computed for every month or part of a month. Where an appellate or rectification order under s.154, s.155, s.250, s.254, s.260, s.262, s.263 or s.264, or an order of the Settlement Commission under s.245D(4), holds the refund correctly allowed in whole or in part, apply in the giving-effect proceedings for the reduction of interest that sub-section (2) requires; it is not discretionary. For an assessment year commencing before 1 June 2003, read Explanation 2 and then go to the library's two decisions on it — cit-v-indian-oil-corporation-234d-explanation-2-retrospective and cit-v-gujarat-state-financial-services-234d-earlier-assessment-years — before conceding or contesting the charge. Where the assessment in question is a first-time assessment under s.147 or s.153A, note that Explanation 1 makes it a regular assessment for this section, so the charge is not answered by saying the order was not passed under s.143(3).
Still good law. The text as stated is the current text so far as I could establish. Four "Year:" stamped section editions were read — 2008, 2009, 2016 and 2018 — and the departmental tutorial page on interest on excess refund, which states the same rate and the same period. The Year 2018 edition is the most recent section edition I located; I did not probe beyond the suffixes returned by search, so a later amendment cannot be excluded. The rate, the period and the commencement of the section are each read off a page and footnoted. The amending Act and effective date of Explanation 2 are NOT established and are not stated. No judicial treatment of the section was examined on this pass; the library already holds two decisions on Explanation 2 and on earlier assessment years, named in this entry. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
FIVE departmental pages were read. The operative text was taken from https://www.incometaxindia.gov.in/w/section-234d-23, which prints "Year: 2018", the Act name "Income-tax Act, 1961", the chapter "CHAPTER XVII - COLLECTION AND RECOVERY OF TAX" and the heading "Interest on excess refund", and which carries sub-sections (1) and (2), Explanation 1 and Explanation 2. https://www.incometaxindia.gov.in/w/section-234d-13 (Year: 2016) prints the same two Explanations and Explanation 2 in identical words. TWO DEPARTMENTAL EDITIONS CONTRADICT EACH OTHER ON THIS SECTION, and the contradiction is the reason this entry exists in the form it does. https://www.incometaxindia.gov.in/w/section-234d-10 (Year: 2008) and https://www.incometaxindia.gov.in/w/section-234d (Year: 2009) print only ONE Explanation — there is no Explanation 2 on either — but they are the only editions that render footnotes, and those footnotes are the sourcing for the rate and the commencement: footnote 29, "Inserted by the Finance Act, 2003, w.e.f. 1-6-2003", and footnote 30, "Substituted for 'two-third' by the Taxation Laws (Amendment) Act, 2003, w.e.f. 8-9-2003" (the Year 2009 page prints the same two footnotes numbered 3 and 4). The Year 2016 and Year 2018 pages print a "Footnotes" heading with nothing under it. So NEITHER edition alone gives the reader the section: a reader who lands on the Year 2008 or Year 2009 page will not find Explanation 2 at all and will conclude the section has no retrospective reach; a reader who lands on the Year 2016 or Year 2018 page will find Explanation 2 but no amending Act for anything. I have taken the text from the Year 2018 page and the amendment history from the Year 2008 page, and say so. WHAT I COULD NOT ESTABLISH: the amending Act that inserted Explanation 2 and its effective date. No reachable departmental page carries a footnote to Explanation 2. https://incometaxindia.gov.in/Acts/Income-tax%20Act,%201961/2013/102120000000027235.htm prints the section with footnote MARKERS 32, 32a, 33 and 34, Explanation 2 carrying marker 34, but the footnote text is not on the page and a second fetch confirmed the document ends at Explanation 2. https://incometaxindia.gov.in/Acts/Finance%20Acts/2003/102120000000009788.htm ("Insertion of new section 234D"), which the departmental search index returns, is a 404 on fetch. No Finance Bill or Finance Act text for the year of insertion of Explanation 2 was reachable. I therefore state Explanation 2's words and say the Act and date are not established. `decided_on` is 2003-06-01, the commencement of the section per footnote 29; the one-half per cent rate as stated took effect later, on 8-9-2003, per footnote 30, and a reader computing interest for a period straddling that date must use the footnote, not this field. COPYRIGHT NOTE, which the library should carry on every entry built off these pages: the departmental /w/ section pages carry the line "© Copyright. Taxmann Publications Pvt. Ltd." and several of their footnotes are editorial cross-references to that publisher's own titles. I have transcribed ONLY footnotes that state a legislative fact — which Act amended what, and from when — and have deliberately reproduced none of the editorial cross-references. The departmental tutorial page https://www.incometaxindia.gov.in/w/interest-on-excess-refund-granted-to-the-taxpayer was also read and states the rate as "@ 1/2 % per month or part of the month" and the period as running from the date of grant of refund under s.143(1) till the date of regular assessment, which corroborates the Year 2018 section text; the fetch reported that page as headed "as amended by the Finance Act, 2026", which I have not independently confirmed and do not rely on. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
Not a judgment. The statutory position is that s.234D charges simple interest where a refund granted to the assessee under s.143(1) is followed by a regular assessment on which either no refund is due or the amount refunded exceeds the amount refundable; that the rate is one-half per cent for every month or part of a month, computed on the whole or the excess amount so refunded, for the period from the date of grant of refund to the date of the regular assessment; that the section was inserted by the Finance Act, 2003 with effect from 1 June 2003 and the rate substituted for "two-third" by the Taxation Laws (Amendment) Act, 2003 with effect from 8 September 2003; that sub-section (2) requires the interest to be reduced accordingly where an order under s.154, s.155, s.250, s.254, s.260, s.262, s.263 or s.264, or an order of the Settlement Commission under s.245D(4), holds the refund correctly allowed in whole or in part; that Explanation 1 treats a first-time assessment under s.147 or s.153A as a regular assessment for the purposes of the section; and that Explanation 2 declares that the section applies also to an assessment year commencing before 1 June 2003 if the proceedings for that year are completed after that date. The amending Act that inserted Explanation 2, and the date from which it was inserted, are not established by any departmental page I could reach.
TaxSphere, “Statutory position — s.234D: interest on a refund granted under s.143(1) that regular assessment shows should not have been granted — the rate, the period, the reduction under sub-section (2), and Explanation 2 for assessment years commencing before 1 June 2003”, https://taxnotice.vittsphere.com/caselaw/case/statutory-position-234d-interest-on-excess-refund-rate-period-and-explanation-2/ (validity last checked 2026-09-17)
The judgment itself is a government work and may be quoted freely. The summary, the validity note and the reasoning on this page are this library's own writing: quote them with attribution, and please do not present either as the words of the court — this page keeps the two apart and so should a quotation of it.
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